Scooter portfolio to keep TVS Motor ahead of peers

However, valuations leave little room for gain

December turned out to be rather disappointing for two-wheeler majors  Hero MotoCorp and Bajaj Auto. The former’s sales growth was flat and the latter’s missed the December 2014 performance by five per cent.

On the other hand, TVS Motor's was 202,086 units, up four per cent over a year before, thanks to its portfolio of scooters, 55 per cent of its volume. This segment showed overall growth of 12 per cent over a year before, compared to only 1.2 per cent more for its motorcycles. Mihir Jhaveri of Religare Capital Markets expects this trend to continue for TVS, as some launches are being readied in scooters.  

On the decline in December sales mentioned earlier, sector experts say the demand has petered after the festive season. Ambit Capital has cut its volume growth estimate for two-wheeler sales to 10 per cent (from the earlier 12 per cent) for 2016-17. It has a 'buy' recommendation for the TVS Motor stock, with a target price of Rs 330. Its analysts feel TVS is better placed to ride the shift in consumer preference to scooters and premium two-wheelers.  

Scooters find large acceptance in urban markets and, hence, tend to be resilient to falling demand in rural markets. In terms of pricing, too, scooters are cost-effective compared to motorcycles.

Analysts believe the positive response for recent launches in the segment (Maestro Edge and Duet) from Hero MotoCorp has helped the company mitigate the dip in demand for motorcycles to some extent. Whereas, lack of presence in the scooter segment might work against Bajaj Auto. Hero’s higher exposure to rural markets and Bajaj’s volumes being largely guided by premium motorcycles explains, feel analysts, why 2015 wasn't a good year for them.

Year-to-date sales of Hero fell nearly 13 per cent and of Bajaj by 10 per cent. TVS Motor is less impacted, with sales volume down five per cent.

That said, the recent rally in TVS Motor’s stock price (up 25 per cent since October has rendered its valuations expensive when compared to peers. The stock is trading at a 12-month trailing price to earnings ratio of 28.2, a steep premium to Hero MotoCorp (17.8) and Bajaj Auto (19.5). Analysts believe dismal rural demand could continue to weigh on stocks of two-wheeler companies in the near term. This year’s monsoon will be watched, as the trend could reverse if it is a good one.